The release of a cash escrow deposited in connection with a share buyback cannot prevent the Securities and Exchange Board of India (SEBI) from separately examining whether the company had engaged in fraudulent conduct, the Supreme Court has ruled.
A bench of Justice JB Pardiwala and Justice KV Viswanathan clarified that compliance with the conditions for release of escrow under Regulation 15B(8) of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998, does not provide immunity from an independent investigation under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
At the same time, the Court declined to finally decide whether fraud had actually been established in the case concerning Vedanta Limited, formerly known as Cairn India Limited.
Instead, it sent the matter back to the Securities Appellate Tribunal (SAT), directing a fresh examination of the fraud allegation.
The Court noted that the original adjudication had not adequately addressed discrepancies in the trading data relied upon by SEBI to establish the alleged fraudulent conduct.
Dispute arose from 2014 buyback
The case concerns Vedanta’s 2014 announcement to buy back approximately 17.09 crore shares, with a maximum buyback price of ₹335 per share. The proposed buyback was to remain open for six months.
However, when the period ended in July 2014, the company had purchased only around 21.48% of the shares it had intended to acquire. It had also used approximately 28.59% of the amount earmarked for the exercise.
SEBI rejected the company’s request to extend the buyback period.
Vedanta subsequently sought the release of the 2.5% cash escrow deposited under the buyback regulations. SEBI eventually released the amount in 2016 after concluding that the company satisfied the regulatory conditions for exemption from forfeiture.
That decision, however, did not bring the matter to an end.
SEBI continued a separate investigation into whether the buyback announcement itself involved fraudulent or misleading conduct in breach of the PFUTP Regulations and Regulation 19(1)(a) of the Buyback Regulations.
SEBI’s penalty was overturned by SAT
Following the investigation, SEBI’s Adjudicating Officer imposed a ₹5.25 crore penalty on Vedanta and penalties of ₹15 lakh each on three individuals.
The allegation was essentially that the company had announced the buyback without a genuine intention of completing it.
SAT subsequently overturned the penalties. It concluded that the allegation of fraud had not been established and accepted the company’s explanation that market conditions had affected the buyback.
SEBI then challenged the SAT ruling before the Supreme Court.
Trading data becomes central to the dispute
During the hearing, SEBI argued that the trading pattern raised serious questions about the company’s conduct.
The regulator pointed to 54 trading days when the market price was at or below the buyback price. According to SEBI, despite these potentially favourable conditions, the company did not place any buy orders on 24 of those days and placed only limited orders on several others.
SEBI also submitted that the company acquired only about 5% of the shares offered for sale on the NSE during such favourable trading periods.
According to the regulator, SAT had focused too heavily on the opening and closing prices during the buyback period instead of examining the detailed day-to-day trading information.
The respondents disputed this interpretation.
They maintained that the company had genuinely sought to carry out the buyback, pointing to the appointment of merchant bankers and buy orders placed on 82 days on the NSE and throughout all 123 trading days on the BSE.
They also argued that the raw number of sell orders did not necessarily represent shares that could realistically have been purchased at the buyback price.
A further dispute concerned inconsistencies in SEBI’s underlying data. The respondents said their request to cross-examine officials from the NSE and BSE over those discrepancies had been rejected by the Adjudicating Officer.
Escrow release and fraud proceedings are separate
The Supreme Court identified a narrow but important legal issue: whether releasing the escrow under the exception contained in Regulation 15B(8) prevents SEBI from subsequently alleging or investigating fraud under the PFUTP Regulations.
The Court answered that question in the negative.
In other words, satisfaction of the conditions for release of escrow does not amount to a regulatory finding that the company’s conduct was free from fraud.
The bench also rejected reliance on an internal note prepared by SEBI’s Legal Affairs Department, which had suggested that pursuing a PFUTP case after the escrow exemption had been granted could be legally difficult.
The Court stressed that departmental file notings do not have binding legal force.
Referring to the principle laid down in M/s Sethi Auto Service Station v. Delhi Development Authority, the Court reiterated that internal administrative notings cannot themselves determine the legal rights or liabilities of parties.
Fraud allegation still requires proper examination
While SEBI succeeded on the legal question concerning the independent fraud inquiry, it did not receive a final finding in its favour on the merits.
The Supreme Court observed that the disputed trading figures had not been properly dealt with either by the Adjudicating Officer or by SAT.
Since those discrepancies could have a direct bearing on whether fraudulent conduct was actually established, the Court considered it appropriate to remit the matter to SAT.
The tribunal will therefore have to reconsider the fraud allegation, taking into account the contested trading data and the parties’ respective contentions.
The ruling draws a clear line between two regulatory questions: release of buyback escrow on fulfilment of specified conditions is one matter; whether the underlying conduct amounted to fraud is another.
The former, the Supreme Court has made clear, cannot automatically shut the door on the latter.
